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Why Must Hewlett Packard Enterprise Be in Your Portfolio?

Shares of Hewlett Packard Enterprise Company (HPE - Free Report) have been rallying since its split from the parent company, driven particularly by its massive restructuring plan.

Notably, Hewlett Packard Enterprise is one of the two publicly traded entities that were formed after the Nov 2015 split of Hewlett-Packard Company. The other company that was formed in the process was HP Inc. (HPQ - Free Report) which focuses on PC and printing products and services.

Hewlett Packard Enterprise has clocked a year-to-date return of over 48%.

What’s Driving the Rally?

We believe that the parent company’s (Hewlett-Packard Company) decision to split the business has been a boon for Hewlett Packard Enterprise. This is because a split allows a customized approach to two different businesses, which may not have been possible while they operated as a single entity.

Since its split, Hewlett Packard Enterprise has been restructuring its business to reap long-term benefits. The company is trying to shift its product mix to the high end and move away from the low-and negative-margin businesses.

In keeping with this effort, the company announced last month that it will spin off the software business and merge the same with British software firm, Micro Focus International Plc, in a cash-stock deal worth $8.8 billion.

The transaction, which is subject to certain regulatory approvals, is anticipated to be tax free for the company. Per the agreement, the company will receive $2.5 billion in cash and a 50.1% stake in the merged entity, which is currently estimated to be worth $6.3 billion.

Also, Hewlett Packard Enterprise completed the sell-off of 84% of its 60.5% equity stake in Mphasis Limited, an IT service provider in Bangalore, India, to The Blackstone Group last month. The transaction has fetched the company around $700 million.

Furthermore, this May, it announced the spin-off of its struggling IT services segment – Enterprise Services – and entered into an agreement to merge the same with Computer Sciences Corp. .

Hewlett Packard Enterprise believes that such massive restructuring moves will complement its focus on core businesses and enable it to compete with players like Oracle (ORCL - Free Report) , Cisco and NetApp as well as the new entrant, Dell.

Bottom Line

Since its split from Hewlett-Packard Company last year, Hewlett Packard Enterprise has been focused on leaving no stone unturned to expand its business. The company has taken every possible step, right from restructuring initiatives and acquisition deals to divestments and alliances, which are now paying off.

Notably, the company’s bottom line results for the last reported quarter were well above the Zacks Consensus Estimate and also marked year over year improvement. Buoyed by better-than-expected earnings, Hewlett Packard Enterprise raised the lower end of its earnings guidance for the full year. The company now expects non-GAAP earnings per share to be $1.90–$1.95 (mid-point: $1.925), up from earlier guidance of $1.85–$1.95 (mid-point: $1.90).

Moreover, the company has done considerably well in the enterprise class server and storage markets. The company concentrates its resources on the high-margin software and security markets as well. We believe that the company’s traction in the cloud, security and Big Data segments will enhance its growth trajectory, going forward.

Also, its strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.

Moreover, the stock looks attractive from a valuation perspective. This is because it currently trades at a forward P/E of 11.64x compared with the industry group average of 45.30x, which signifies a huge upward potential.

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